Ponzi schemes - Modern evolution of old-style fraud

We have recently identified new and updated variations on a well-worn variety of “Ponzi” scheme fraud.

What is a Ponzi scheme?

Ponzi schemes are ‘get rich quick’ investment scams named after Charles Ponzi, an Italian born fraudster, who operated the first scheme in North America in the 1920’s.

How do they work?

They are investment scams, sometimes known as “high yield” or “pyramid” schemes offering high rates of return on investments. They are frequently based on non-existent or greatly exaggerated underlying investments. New investors’ funds are used to pay old investors while the proponents of the scheme syphon off the monies for their benefit.

They target levels of income over varying return periods and are based on initially paying fabulous returns to build new investor confidence. They must continue to expand to survive and inevitably fail with the fraudsters typically making off with the money, leaving the remaining investors empty handed.

Almost 100 years on - what’s new?

The ever-vigilant fraudster is keen to project a facade of respectability, anticipating cautious investors will conduct their own research. They will register a company with ‘front’ Directors or acquire an existing company and will have a convincing website for added authenticity. They will often use a prestigious ‘City’ address which is in reality a serviced office, merely a mail forwarding and telephone answering service. The real operation will be based at a secure location many miles away and using state of the art VoIP (Voice Over Internet Protocol) technology may even be based in an overseas jurisdiction.

Investment and pension scams have become increasingly more sophisticated with some newly offered schemes taking advantage of changes to legislation in 2015 allowing people over 55 to access their pensions. In response, the creative fraudster offers ‘niche’ investments with ‘guaranteed high returns’ over a fixed period tailored to the Pension market. Typical features are a fixed ‘unit’ price of £20,000 to £25,000 for a fixed period of between 3 to 8 years. The underlying asset backed investment is often ‘guaranteed’ by promises to buy back or market the investment at the end of the period. Investment products we have recently seen offered include hotel rooms, airport parking, student accommodation, overseas property, forestry plantations, office or storage space.

These new types of ‘niche’ investments are quite clever in that the high interest, fixed period and asset backed investment gives investors comfort when in reality the fixed period allows promotors to keep selling. What investors aren’t told is that introducers earn high commissions, scheme promoters pay themselves generous salaries, illiquid assets are difficult to sell and ‘guarantees’ are only as good as the underlying unregulated company. We are likely to see a spike in the number of such ‘alternative investments’ failing as the investment periods expire and a critical mass of investors attempt to sell or redeem their investments.

Telltale indicators of a Ponzi scheme:

High investment returns with purported low risk

Unregulated investments and unregistered sales staff

Secretive and/or complex strategies

Issues with documentation

Increasing difficulty receiving payments

Overly consistent investment returns

How can we help?

If you have a client who has been the victim of an Investment fraud, we have the capability and expert contacts to assist. We have a proven track records of recovering assets in similar cases. Our multidisciplinary teams include former Serious Fraud Office and Police investigators, with experience of tracing assets across multiple jurisdiction.

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